Darwin's Lessons for the Extractive Industry

Environmental and social performance is shaping a new breed of oil, gas, and mining companies.

This week, shareholders at Chevron’s annual meeting in California will vote on a resolution urging management to assess the company's compliance with the environmental laws of every country in which it operates. The vote has been triggered by pension fund investors anxious over the oil giant's liabilities in an environmental disaster dubbed the "Amazon Chernobyl." (Update: Shareholders rejected the resolution on Wednesday, May 27. Read more here.)

Chevron inherited a lawsuit for ecological damages and human health impacts caused by massive oil spills in the species-rich rainforests of eastern Ecuador when it bought the company responsible, Texaco, in 2001. An Ecuadorean court judgment is due later this year, with Chevron facing damages that may dwarf the $3.9 billion paid by ExxonMobil for the infamous 1989 Alaskan oil spill.

The lesson in all this is one that is being learned not only by Chevron, but by the broader extractive industry: in our modern world of instant communications, Darwin’s theory of evolution applies not only to animals and plants, but also to companies.

Survival depends on being able to adapt to a changing environment. Oil, gas, and mineral reserves have been depleted, and the extractive industry increasingly competes for access to resources in remote corners of developing countries. In these new environments, companies face challenges that go well beyond engineering, including fragile ecosystems, impoverished communities, and weak local governance.

In earlier times, they might have been able to ignore such issues. But today, business-as-usual approaches will no longer suffice.

The world has become a global fish bowl. Modern information and communication technologies, combined with increasingly sophisticated and networked NGOs and local activists, subject companies to a level of scrutiny and accountability unimaginable even a decade ago. The voices of communities in the remotest corners of the globe can reach the ears of politicians and journalists worldwide in just a few hours. Campaigns have also grown in sophistication. Some NGOs directly support communities impacted on the ground. Others, like the BankTrack network in the Netherlands, focus on extractive companies' financiers, campaigning against banks to remove harmful project financing lifelines.

Banks, in turn, are requiring their clients to demonstrate stronger environmental and social commitments. The International Finance Corporation (IFC), the private financing arm of the World Bank, has developed a set of "Performance Standards" that clients must meet before receiving financing. Other banks, such as the private financial institutions who have signed up to the Equator Principles, voluntarily commit to apply the IFC’s Performance Standards to their investments. John Ruggie, the UN Special Rapporteur on business and human rights, has explicitly recognized this new playing field, emphasizing the importance of the "court of public opinion"— regardless of what a developing country's laws require.

On the frontline of extractive development, communities are increasingly intolerant of mining companies that sacrifice the environment for short-term economic benefits. In addition to the Chevron case, communities from the Peruvian Amazon have brought a lawsuit in California against Occidental Petroleum (Oxy), alleging that the company discharged oil wastewater into communities’ water sources, and Shell is facing a lawsuit in New York for its alleged human rights abuses in Nigeria in the 1990s. Both Ecuador and Peru have also seen massive social protests in the past year against controversial mining policies.

While a company like Chevron or Shell may survive a multi-billion dollar judgment, the reputational damage of legal settlements is increasingly likely to result in governments, banks, and communities hesitating to do business with such companies in the future. President Correa of Ecuador, for example, took a public stance against Chevron, and the company will almost certainly not be able to operate in the country for several decades.

In true Darwinian fashion, the most successful extractive companies are adapting to these forces of change, investing in improvements to their environmental and social management systems. Thriving in this new competitive environment, however, is not simply about corporate charity or token consultations with communities. It entails making environmental and social management, and respect for human rights, central to companies’ business model. Communities must be engaged at all stages of operations, from exploration through to restoration, and must have the opportunity to participate in key decisions.

Community consent, and the reputational benefits in the wider world that it brings, will likely be the prize of those companies that manage to ground their operations in a longer-term development process that is sustainable beyond the life of a project. Skills in effective community development may soon be an extractive company’s most competitive trait.